SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-25233
PROVIDENT BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 80-0091851
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
400 Rella Boulevard, Montebello, New York 10901
(Address of Principal Executive Office) (Zip Code)
(845) 369-8040
(Registrant's Telephone Number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding
----------------------- ------------------
$0.01 per share 39,646,462
as of August 6, 2004
1
PROVIDENT BANCORP, INC.
QUARTERLY PERIOD ENDED JUNE 30, 2004
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
at June 30, 2004 and September 30, 2003 3-4
Consolidated Statements of Income for the Three Months and
Nine Months Ended June 30, 2004 and 2003 5
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended June 30, 2004 6
Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 2004 and 2003 7-8
Consolidated Statements of Comprehensive Income/Loss for the
Three Months and Nine Months Ended June 30, 2004 and 2003 9
Notes to Consolidated Financial Statements 10-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-36
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 36-37
Item 4. Controls and Procedures 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 2. Changes in Securities and Use of Proceeds 38
Item 3. Defaults upon Senior Securities 39
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 5. Other Information 39
Item 6. Exhibits and Reports on Form 8-K 40
Signature 41
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except per share data)
Assets June 30, 2004 September 30, 2003
------------- ------------------
Cash and due from banks $ 33,686 $ 33,500
Securities (Note 7):
Available for sale, at fair value (amortized cost of
$578,034 at June 30, 2004 and $294,801 at
September 30, 2003) 571,962 300,715
Held to maturity, at amortized cost (fair value of $ 70,939
at June 30, 2004 and $75,628 at September 30, 2003) 70,066 73,544
----------- -----------
Total securities 642,028 374,259
----------- -----------
Loans held for sale 1,385 2,364
Gross loans (Note 5) 987,881 714,253
Allowance for loan losses (Note 6) (17,331) (11,069)
----------- -----------
Total loans, net 970,550 703,184
----------- -----------
FHLB stock, at cost 9,755 8,220
Accrued interest receivable, net 6,666 4,851
Premises and equipment, net 16,259 11,647
Goodwill (Notes 2 and 3) 65,823 13,540
Core deposit intangible 6,219 1,063
Bank owned life insurance 13,116 12,483
Other assets 17,183 9,194
----------- -----------
Total assets $ 1,782,670 $ 1,174,305
=========== ===========
(Continued)
3
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED
(Unaudited)
(Dollars in thousands, except per share data)
Liabilities and Stockholders' Equity June 30, 2004 September 30, 2003
------------- ------------------
Liabilities:
Deposits (Note 8):
Non-interest bearing $ 276,864 $ 163,009
Interest bearing 963,963 706,544
----------- -----------
Total deposits 1,240,827 869,553
Borrowings 169,552 164,757
Mortgage escrow funds 12,365 3,949
Other 17,282 18,189
----------- -----------
Total liabilities 1,440,026 1,056,448
----------- -----------
Stockholders' equity:
Preferred stock (par value $0.01per share; 10,000,000 shares authorized; none
issued or outstanding at June 30, 2004 and
par value $0.10 per share; 10,000,000 shares authorized; none
issued or outstanding at September 30, 2003) -- --
Common stock (par value $0.01 per share; 75,000,000 shares
authorized; 39,638,415 shares issued and outstanding at June 30, 2004; par
value $0.10 per share; 20,000,000 shares authorized; 8,280,000 shares issued;
7,946,521 shares outstanding
at September 30, 2003) 396 828
Additional paid-in capital 268,438 38,032
Unallocated common stock held by the employee stock
ownership plan ("ESOP") (1,456,416 shares at June 30, 2004
and 273,789 shares at September 30, 2003) (11,073) (1,597)
Common stock awards under recognition and retention plan ("RRP") (127) (506)
Treasury stock, at cost ( 0 shares at June 30, 2004 and
333,479 shares at September 30, 2003) -- (7,780)
Retained earnings 88,713 85,398
Accumulated other comprehensive income (3,703) 3,482
----------- -----------
Total stockholders' equity 342,644 117,857
----------- -----------
Total liabilities and stockholders' equity $ 1,782,670 $ 1,174,305
=========== ===========
Book value at period end $ 8.64 $ 3.28
See accompanying notes to unaudited consolidated financial statements.
4
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share data)
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Interest and dividend income:
Loans $ 14,300 $ 10,712 $ 38,651 $ 33,187
Securities 5,646 3,425 14,633 10,236
Other earning assets 38 115 103 292
----------- ----------- ----------- -----------
Total interest and dividend income 19,984 14,252 53,387 43,715
----------- ----------- ----------- -----------
Interest expense:
Deposits 2,137 1,831 5,682 6,127
Borrowings 1,350 1,144 3,719 3,184
----------- ----------- ----------- -----------
Total interest expense 3,487 2,975 9,401 9,311
----------- ----------- ----------- -----------
Net interest income 16,497 11,277 43,986 34,404
Provision for loan losses (Note 6) 225 200 575 800
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 16,272 11,077 43,411 33,604
----------- ----------- ----------- -----------
Non-interest income:
Banking fees and service charges 1,910 1,196 5,082 3,399
Gain on sales of securities available for sale 446 811 1,894 1,895
Gains on sales of loans 61 394 231 836
Other 458 487 1,255 1,128
----------- ----------- ----------- -----------
Total non-interest income 2,875 2,888 8,462 7,258
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits 6,070 4,424 16,523 12,976
Stock-based compensation plans 558 411 2,083 1,419
Occupancy and office operations 1,844 1,321 4,834 3,811
Advertising and promotion 509 378 1,544 1,289
Professional fees 656 426 1,660 1,214
Data and check processing 1,076 783 2,585 2,161
Stationery and office supplies 346 149 785 392
Merger integration costs 56 -- 773 --
Amortization of core deposit intangible 681 103 1,468 345
Establishment of charitable foundation -- -- 5,000 --
Other 1,709 1,181 4,470 3,599
----------- ----------- ----------- -----------
Total non-interest expense 13,505 9,176 41,725 27,206
----------- ----------- ----------- -----------
Income before income tax expense 5,642 4,789 10,148 13,656
Income tax expense 1,988 1,683 3,377 4,989
----------- ----------- ----------- -----------
Net income $ 3,654 $ 3,106 $ 6,771 $ 8,667
=========== =========== =========== ===========
Weighted average common shares:(1)
Basic 37,806,911 34,149,200 36,450,748 34,193,558
Diluted 38,426,183 34,680,987 37,068,663 34,699,674
Per common share: (Note 9)(1)
Basic $ 0.10 $ 0.09 $ 0.19 $ 0.25
Diluted 0.10 0.09 0.18 0.25
Dividends declared 0.04 0.04 0.11 0.09
See accompanying notes to unaudited consolidated financial statements.
- ----------
(1) Common share information has been adjusted to reflect the stock split of
4.4323 in connection with the second step conversion in January 2004.
5
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 2004
(Unaudited)
(In thousands, except share and per share data)
Common
Number of Additional Stock
Shares Common Paid-In Unallocated Awards
Outstanding(1) Stock Capital ESOP Shares Under RRP
-------------- ----- ------- ----------- ---------
Balance at September 30, 2003 7,946,521 $ 828 $ 38,032 $ (1,597) $(506)
Net Income
Other comprehensive income
Total comprehensive income
Recapitalization (Note 2) 7,700,331 (672) (6,913)
Common stock offering 19,573,000 196 192,167
Formation of charitable foundation 400,000 4 3,996
Purchase of ENB Holding Co., Inc. 3,969,676 40 39,657
Establishment of ESOP Plan
(998,650 shares) (9,987)
Tax benefits:
Contribution of 400,000 shares 115
MHC contribution carryforward 512
Stock option transactions 48,887 9
ESOP shares allocated or committed to
be released for allocation
(125,639 shares) 863 511
Vesting of RRP shares 379
Cash dividends paid ($0.11
per common share)
---------- ----- --------- -------- -----
Balance at June 30, 2004 39,638,415 $ 396 $ 268,438 $(11,073) $(127)
========== ===== ========= ======== =====
Accumulated
Other Total
Treasury Retained Comprehensive Stockholders'
Stock Earnings Income Equity
----- -------- ------ ------
Balance at September 30, 2003 $(7,780) $ 85,398 $ 3,482 $ 117,857
Net Income 6,771 6,771
--------
Other comprehensive income (7,185) (7,185)
------- ---------
Total comprehensive income (414)
Recapitalization (Note 2) 7,680 95
Common stock offering 192,363
Formation of charitable foundation 4,000
Purchase of ENB Holding Co., Inc. 39,697
Establishment of ESOP Plan
(998,650 shares) (9,987)
Tax benefits:
Contribution of 400,000 shares 115
MHC contribution carryforward 512
Stock option transactions 100 (34) 75
ESOP shares allocated or committed to
be released for allocation
(125,639 shares) 1,374
Vesting of RRP shares 379
Cash dividends paid ($0.11
per common share) (3,422) (3,422)
------- -------- ------- ---------
Balance at June 30, 2004 $ 0 $ 88,713 $(3,703) $ 342,644
======= ======== ======= =========
- ----------
(1) Share information has been adjusted to reflect 4.4323 conversion ratio in
connection with the Company's second step conversion in January 2004.
See accompanying notes to unaudited consolidated financial statements.
6
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended June 30,
(In thousands) 2004 2003
---- ----
Cash flows from operating activities:
Net income $ 6,771 $ 8,667
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 575 800
Depreciation and amortization of premises
and equipment 1,708 1,456
Amortization of core deposit intangible 1,468 345
Gain on sales of securities available for sale (1,894) (1,895)
Gain on sales of loans held for sale (231) (836)
Gain on sales of fixed assets sold (50) --
Gain on sale of real estate owned (55) --
Net amortization of premiums and discounts
on securities 1,967 796
ESOP and RRP expense 1,753 1,116
Originations of loans held for sale (10,101) (34,997)
Proceeds from sales of loans held for sale 11,311 33,279
Deferred income tax (benefit) expense (3,154) 485
Net changes in accrued interest receivable
and payable 353 920
Other adjustments (principally net changes
in other assets and other liabilities) (2,808) 787
----------- -----------
Net cash provided by
operating activities 7,613 10,923
----------- -----------
Cash flows from investing activities:
Purchases of securities:
Available for sale (443,267) (128,102)
Held to maturity (9,349) (27,458)
Proceeds from maturities, calls and other
principal payments on securities:
Available for sale 72,389 58,113
Held to maturity 15,804 31,255
Proceeds from sales of securities available for sale 113,536 22,979
Loan originations (251,328) (278,856)
Loan principal payments 197,136 256,183
Proceeds from sales of fixed assets 411 --
Proceeds from sales of other real estate owned 135 210
Purchase of FHLB stock (1,535) (471)
Purchase of ENB Holding Company, Inc. 60,144 --
Purchase of bank owned life insurance (423) (12,000)
Purchases of premises and equipment (2,371) (2001)
----------- -----------
Net cash used in investing activities (248,718) (80,148)
----------- -----------
(continued)
7
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(In thousands)
For the Nine Months
Ended June 30,
--------------
2004 2003
---- ----
Cash flows from financing activities:
Net increase in transaction and savings deposits $ 50,378 $ 69,140
Net decrease in time deposits (6,049) (11,207)
Receipt of stock subscription funds 192,363 --
Net increase in borrowings 4,795 13,764
Net increase in mortgage escrow funds 8,416 9,308
Establishment of ESOP plan (9,987) --
Common stock issued for formation of charitable foundation 4,000 --
Tax benefit: contribution of 400,000 shares to charitable
foundation 115 --
Tax benefit: MHC contribution carry-forward 512 --
Recapitalization 95 --
Treasury shares purchased -- (1,898)
Exercises of stock options 75 369
Cash dividends paid (3,422) (1,871)
--------- ---------
Net cash provided by financing activities 241,291 77,605
--------- ---------
Net increase in cash and cash equivalents 186 8,380
Cash and cash equivalents at beginning of period 33,500 35,093
--------- ---------
Cash and cash equivalents at end of period $ 33,686 $ 43,473
========= =========
Supplemental information:
Interest payments $ 8,952 $ 9,311
Income tax payments 3,135 4,101
Fair value of assets acquired (incl. intangibles) 406,267 --
Fair value of liabilities assumed 329,797 --
Net fair value 76,470 --
Cash portion of ENB Holding Co. purchase transaction 36,773 --
Stock portion of ENB Holding Co. purchase transaction 39,697 --
Total paid for ENB Holding Co. stock 76,470 --
Transfer of loans to real estate owned 112 99
Net change in unrealized gains/ (losses) recorded on
securities available for sale (11,988) (2,549)
Change in deferred taxes on unrealized (gains)/losses
on securities available for sale 4,791 1,014
See accompanying notes to unaudited consolidated financial statements.
8
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
(Unaudited)
(Dollars in thousands)
Three Months Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Net income: $ 3,654 $ 3,106 $ 6,771 $ 8,667
Other comprehensive income (loss):
Net unrealized gains (losses) on securities
available for sale:
Net unrealized holding gains (losses)
arising during the year, net of taxes of
$5,211, $(92), $4,033, $256 (7,817) 137 (6,049) (386)
Less reclassification adjustment for
net realized (gains) losses included in net income,
net of taxes of $178, $323, $758, $758 (268) (488) (1,136) (1,137)
Net unrealized gain on
derivatives, net of taxes
of $(6) -- -- -- 10
--------- --------- --------- ---------
Other comprehensive income (loss) (8,085) (351) (7,185) (1,513)
--------- --------- --------- ---------
Total comprehensive income (loss) $ (4,431) $ 2,755 $ (414) $ 7,154
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
9
PROVIDENT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
The consolidated financial statements and other financial information
presented in this document as of June 30, 2004, include the accounts of
Provident Bancorp, Inc., a Delaware corporation (the "Company"), Shawangunk
Holding Co., Inc. (an inactive subsidiary), Provident Bank (the "Bank"), and
each subsidiary of Provident Bank (Provest Services Corp., Provest Services
Corp. I, Provest Services Corp. II, Provident REIT, Inc. and Provident Municipal
Bank). Collectively, these entities are referred to herein as the "Company."
Provident Bancorp, Inc. is a publicly-held company and the parent of Provident
Bank. Provest Services Corp. holds an investment in a low-income housing
partnership that provides certain favorable tax consequences. Provest Services
Corp. II has engaged a third-party provider to sell annuities to the customers
of Provident Bank. Through June 30, 2004, the activities of these two
wholly-owned subsidiaries have had a minor impact on the Company's consolidated
financial condition and results of operations. Provident REIT, Inc. holds a
portion of the Company's real estate loans and is a real estate investment trust
for federal income tax purposes. Provident Municipal Bank ("PMB") is a limited
purpose New York State-chartered commercial bank, which began operations on
April 19, 2002 and is authorized to accept deposits from municipalities in the
Bank's business area.
The Company's off-balance sheet activities are limited to loan origination
commitments, lines of credit and letters of credit extended to customers in the
ordinary course of its lending activities. The Company does not engage in
off-balance sheet financing transactions or other activities involving the use
of special-purpose entities.
The consolidated financial statements have been prepared by management
without audit, but, in the opinion of management, include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the Company's financial position and results of operations as of the dates and
for the periods presented. Although certain information and footnote disclosures
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on Form 10-Q,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The results of operations for the nine months ended
June 30, 2004 are not necessarily indicative of results to be expected for other
interim periods or the entire fiscal year ending September 30, 2004. The
unaudited consolidated financial statements presented herein should be read in
conjunction with the annual audited financial statements included in the
Company's Form 10-K for the fiscal year ended September 30, 2003.
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expense. Actual results could differ significantly from
these estimates. A material estimate that is particularly susceptible to
near-term change is the allowance for loan losses (see Note 6), which is a
critical accounting policy.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
10
Stock-Based Compensation
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plan.
No stock-based employee compensation cost is reflected in net income, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of the grant. SFAS No. 123,
Accounting for Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123. The
following table illustrates the effect on net income if the fair-value-based
method had been applied to all outstanding awards in each period. In April 2003
the FASB decided to require all companies to expense the value of employee stock
options commencing in 2005, but has not decided how to measure the fair value of
the options. As such, the financial statement impact of stock option expensing
is not known at this time.
Three Months Ended Nine Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 3,654 $ 3,106 $ 6,771 $ 8,619
Add RRP expense included in reported net
income, net of related tax effects 75 83 227 249
Deduct RRP and stock option expense
determined under the fair-value-based
method, net of related tax effects (165) (98) (388) (297)
--------- --------- --------- ---------
Pro forma net income $ 3,564 $ 3,091 $ 6,610 $ 8,619
========= ========= ========= =========
Earnings per share:
Basic, as reported $ 0.10 $ 0.09 $ 0.19 $ 0.25
Basic, pro forma 0.09 0.09 0.18 0.25
Diluted, as reported 0.10 0.09 0.18 0.25
Diluted, pro forma 0.09 0.09 0.18 0.25
2. Mutual Holding Company Conversion and Acquisition of E.N.B. Holding
Company, Inc.
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC. As a result of the
conversion, the Company became the stock holding company of the Bank. In the
stock offering, shares representing Provident Bancorp, MHC's ownership interest
in Provident Bancorp., Inc., a federal corporation ("Provident Federal") were
sold to investors. In addition, the Company simultaneously completed its
acquisition of E.N.B. Holding Company, Inc., ("ENB") located in Ellenville, New
York.
The Company sold 19,573,000 shares of common stock at $10.00 per share to
depositors of the Bank as of June 30, 2002 and September 30, 2003. The new
holding company also issued 400,000 shares of common stock and contributed $1.0
million in cash to the Provident Bank Charitable Foundation. In addition, each
outstanding share of common stock of Provident Federal as of January 14, 2004
has been converted into 4.4323 new shares of the Company's common stock.
11
Shareholders of ENB as of the close of business on January 14, 2004
received total merger consideration of approximately $76.47 million, consisting
of 3,969,676 shares of common stock of the Company and approximately $36.77
million in cash.
As a result of the above transactions, the Company had 39,608,586 issued
and outstanding shares at January 14, 2004.
Financial statements as of June 30, 2004, reflect the effect of the
conversion of existing common shares, the stock offering and the acquisition of
ENB. Goodwill recorded in the ENB acquisition ($52.3million) is not amortized to
expense, but instead is reviewed for impairment at least annually, with
impairment losses charged to expense, if and when they occur. The core deposit
intangible asset ($5.4 million at June 30, 2004), is recognized apart from
goodwill and amortized to expense over its estimated useful life and evaluated
for impairment.
3. Acquisition of The National Bank of Florida
On April 23, 2002, the Company consummated its acquisition, for cash, of
The National Bank of Florida ("NBF"), which was merged with and into the Bank.
The transaction was valued at approximately $28.1 million. At the acquisition
date, NBF had total assets of approximately $104 million and total deposits of
approximately $88.2 million. Amounts attributable to NBF are included in the
Company's consolidated financial statements from the date of acquisition.
Goodwill recorded in the NBF acquisition ($13.5 million) is not amortized
to expense, but instead is reviewed for impairment at least annually, with
impairment losses charged to expense, if and when they occur. The core deposit
intangible asset, ($829,000 and $1.1 million at June 30, 2004 and September 30,
2003, respectively), is recognized apart from goodwill and amortized to expense
over its estimated useful life and evaluated for impairment.
4. Critical Accounting Policies
The accounting and reporting policies of the Company are prepared in
accordance with accounting principles generally accepted within the United
States of America and conform to general practices within the banking industry.
Accounting policies considered critical to the Company's financial results
include the allowance for loan losses, accounting for goodwill and the
recognition of interest income. The methodology for determining the allowance
for loan losses is considered by management to be a critical accounting policy
due to the high degree of judgment involved, the subjectivity of the assumptions
utilized and the potential for changes in the economic environment that could
result in changes to the amount of the allowance for loan losses considered
necessary. Accounting for goodwill is considered to be a critical policy because
goodwill must be tested for impairment at least annually using a "two-step"
approach that involves the identification of reporting units and the estimation
of fair values. The estimation of fair values involves a high degree of judgment
and subjectivity in the assumptions utilized. Interest income on loans,
securities and other interest-earning assets is accrued monthly unless
management considers the collection of interest to be doubtful. Loans are placed
on nonaccrual status when payments are contractually past due 90 days or more,
or when management has determined that the borrower is unlikely to meet
contractual principal or interest obligations. At such time, unpaid interest is
reversed by charging interest income. Interest payments received on nonaccrual
loans (including impaired loans) are recognized as income unless future
collections are doubtful. Loans are returned to accrual
12
status when collectibility is no longer considered doubtful (generally, when all
payments have been brought current). Application of assumptions different than
those used by management could result in material changes in the Company's
financial position or results of operations. Footnote 3 (Summary of Significant
Accounting Policies) of the 2003 Annual Report on Form 10-K provides detail with
regard to the Company's accounting for the allowance for loan losses. There have
been no significant changes in the application of accounting policies since
September 30, 2003.
5. Loans
Major classifications of loans, excluding loans held for sale, are
summarized below:
June 30, 2004 September 30, 2003
------------- ------------------
Real estate - residential mortgage $ 383,012 $ 380,776
Real estate - commercial mortgage 334,626 188,360
Real estate - construction 43,645 10,323
Commercial and industrial 101,418 54,174
Consumer loans 125,180 80,620
----------- -----------
Total $ 987,881 $ 714,253
=========== ===========
6. Allowance for Loan Losses and Non-Performing Assets
The allowance for loan losses is established through provisions for losses
charged to earnings. Loan losses are charged against the allowance when
management believes that the collection of principal is unlikely. Recoveries of
loans previously charged-off are credited to the allowance when realized.
The allowance for loan losses is the amount that management has determined
to be necessary to absorb probable loan losses inherent in the existing
portfolio. Management's evaluations, which are subject to periodic review by the
Company's regulators, are made using a consistently-applied methodology that
takes into consideration such factors as the Company's past loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and collateral values, and
current economic conditions that may affect the borrowers' ability to pay.
Changes in the allowance for loan losses may be necessary in the future based on
changes in economic and real estate market conditions, new information obtained
regarding known problem loans, regulatory examinations, the identification of
additional problem loans, and other factors.
Activity in the allowance for loan losses for the periods indicated is
summarized below:
Three Months Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Balance at beginning of period $ 17,093 $ 10,901 $ 11,069 $ 10,383
Allowance acquired through acquisition -- -- 5,750 --
Provision for loan losses 225 200 575 800
Charge-offs (101) (100) (249) (232)
Recoveries 114 54 186 104
-------- -------- -------- --------
Balance at end of period $ 17,331 $ 11,055 $ 17,331 $ 11,055
======== ======== ======== ========
13
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated. At both dates, the Company had no
troubled debt restructurings (loans for which a portion of interest or principal
has been forgiven and loans modified at interest rates materially less than
current market rates).
June 30, 2004 September 30, 2003
------------- ------------------
Non-accrual loans:
One- to four-family residential mortgage loans $1,129 $ 951
Commercial real estate, commercial business
and construction loans 4,146 3,632
Consumer loans 202 114
------ ------
Total non-performing loans 5,477 4,697
Real estate owned:
One- to four-family residential -- --
------ ------
Total non-performing assets $5,477 $4,697
====== ======
Ratios:
Non-performing loans to total loans, net 0.55% 0.66%
Non-performing assets to total assets 0.31% 0.40%
Allowance for loan losses to total
non-performing loans 316.43% 235.66%
Allowance for loan losses to total loans 1.75% 1.55%
14
7. Securities
The following is a summary of securities available for sale at June 30, 2004 and
September 30, 2003:
Available for Sale Portfolio
June 30, 2004
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
========================================================
Mortgage-backed and SBA Securities
Mortgage-backed securities $341,560 $ 1,282 $ (4,754) $338,088
Collateralized mortgage obligations 10,942 1 (164) 10,779
SBAs and other 181 1 -- 182
-------- -------- -------- --------
Total mortgage-backed and SBA securities 352,683 1,284 (4,918) 349,049
-------- -------- -------- --------
Investment Securities
U.S. Government and federal agency
securities 203,056 488 (2,636) 200,908
State and municipal securities 21,290 60 (553) 20,797
Equity securities 1,005 327 (124) 1,208
-------- -------- -------- --------
Total investment securities 225,351 875 (3,313) 222,913
-------- -------- -------- --------
Total available for sale $578,034 $ 2,159 $ (8,231) $571,962
======== ======== ======== ========
Available for Sale Portfolio
September 30, 2003
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
========================================================
Mortgage-backed and SBA Securities
Mortgage-backed securities $135,049 $ 2,541 $ (648) $136,942
Collateralized mortgage obligations 19,733 -- (55) 19,678
SBAs and other 206 -- -- 206
-------- -------- -------- --------
Total mortgage-backed and SBA securities 154,988 2,541 (703) 156,826
-------- -------- -------- --------
Investment Securities
U.S. Government and federal agency
securities 130,186 3,278 (60) 133,404
State and municipal securities 2,545 26 (35) 2,536
Corporate debt securities 6,030 593 -- 6,623
Equity securities 1,052 359 (85) 1,326
-------- -------- -------- --------
Total investment securities 139,813 4,256 (180) 143,889
-------- -------- -------- --------
Total available for sale $294,801 $ 6,797 $ (883) $300,715
======== ======== ======== ========
15
The following is a summary of securities held to maturity at June 30, 2004 and
September 30, 2003:
Held to Maturity Portfolio
June 30, 2004
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
===================================================
Mortgage-backed securities
Mortgage-backed securities $38,873 $ 806 $ (474) $39,205
Collateralized mortgage obligations 3,135 66 -- 3,201
------- ------- ------- -------
Total mortgage-backed securities 42,008 872 (474) 42,406
------- ------- ------- -------
Investment securities
State and municipal securities 27,749 837 (319) 28,267
Other investments 309 -- (43) 266
------- ------- ------- -------
Total investment securities $28,058 $ 837 $ (362) $28,533
------- ------- ------- -------
Total held to maturity $70,066 $ 1,709 $ (836) $70,939
======= ======= ======= =======
Held to Maturity Portfolio
September 30, 2003
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
===================================================
Mortgage-backed securities $50,863 $ 1,271 $ (255) $51,879
Collateralized mortgage obligations 4,297 66 -- 4,363
------- ------- ------- -------
Total mortgage-backed securities 55,160 1,337 (255) 56,242
------- ------- ------- -------
Investment securities
State and municipal securities 18,384 1,003 (1) 19,386
------- ------- ------- -------
Total held to maturity $73,544 $ 2,340 $ (256) $75,628
======= ======= ======= =======
16
At June 30, 2004 and September 30, 2003, the unrealized net gain/ (loss)
on securities available for sale [net of tax of ($2,369) and $2,432,
respectively] that was included in accumulated other comprehensive income, a
separate component of stockholders' equity, was ($3,703) and $3,482
respectively. Gross realized gains were $ 446 and $811 respectively, for the
three months ended June 30, 2004 and 2003, $1,894 and $1,895, respectively, for
the nine months ended September 30, 2004 and 2003.
Securities with a carrying amount of $127,650 and $69,452 were pledged as
collateral for municipal deposits, borrowings and other purposes at June 30,
2004 and September 30, 2003, respectively.
8. Deposits
Major classifications of deposits are summarized below:
June 30, 2004 September 30, 2003
------------- ------------------
Demand deposits:
Retail $ 131,162 $ 90,471
Commercial and municipal 145,702 72,538
NOW 87,851 62,367
---------- ----------
Total transaction accounts 364,715 225,376
Money market 159,808 128,222
Savings 370,475 279,717
Time under $100,000 249,390 187,623
Time over $100,000 96,439 48,615
---------- ----------
Total $1,240,827 $ 869,553
========== ==========
9. Earnings Per Common Share
The number of shares used in the computation of both basic and diluted
earnings per share includes all shares issued to Provident Bancorp, MHC for all
periods through January 14, 2004, but excludes unallocated ESOP shares that have
not been released or committed to be released to participants. Unvested RRP
shares are excluded from basic earnings per share calculations only.
The common stock equivalent shares are incremental shares (computed using
the treasury stock method) that would have been outstanding if all potentially
dilutive stock options and unvested RRP shares were exercised or became vested
during the periods.
Prior period share information has been adjusted to reflect the 4.4323
exchange ratio in connection with the second-step conversion completed January
14, 2004.
17
Basic earnings per common share is computed as follows (dollars in
thousands, except per share data):
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted average common shares
outstanding (basic) 37,806,911 34,149,200 36,450,748 34,193,558
----------- ----------- ----------- -----------
Net income $ 3,654 $ 3,106 $ 6,771 $ 8,667
Basic earnings per common share $ 0.10 $ 0.09 $ 0.19 $ 0.25
Diluted earnings per common share is computed as follows (dollars in
thousands, except per share data):
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted average common shares
outstanding 37,806,911 34,149,200 36,450,748 34,193,558
Effect of common stock equivalents 619,272 531,787 617,915 506,116
----------- ----------- ----------- -----------
Total diluted shares 38,426,183 34,680,987 37,068,663 34,699,674
Net income $ 3,654 $ 3,106 $ 6,771 $ 8,667
Diluted earnings per common share $ 0.10 $ 0.09 $ 0.18 $ 0.25
10. Guarantor's Obligations Under Guarantees
Standby letters of credit are commitments issued by the Company on behalf
of its customer/obligor in favor of a beneficiary that specify an amount the
Company can be called upon to pay upon the beneficiary's compliance with the
terms of the letter of credit. These commitments are primarily issued in favor
of local municipalities to support the obligor's completion of real estate
development projects. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
As of June 30, 2004, the Company had $10.8 million in outstanding letters
of credit, of which $2.2 million were secured by cash collateral.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for 2004 and, in certain instances, subsequent periods. The
Company cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, and that statements for subsequent periods
are subject to greater uncertainty because of the increased likelihood of
changes in underlying factors and assumptions. Actual results could differ
materially from forward-looking statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements; pricing
pressures on loan and deposit products; changes in local and national economic
conditions; the extent and timing of actions of the Company's regulators;
customer deposit disintermediation; changes in customers' acceptance of the
Company's products and services; general actions of competitors, other normal
business risks such as credit losses, litigation, increases in the levels of
non-performing assets, revenues following acquisitions if such revenues are
lower than expected, and costs or difficulties related to the integration of
acquired and existing businesses that are greater than expected. The Company's
forward-looking statements speak only as of the date on which such statements
are made. The Company assumes no duty to update forward-looking statements to
reflect new, changing or unanticipated events or circumstances.
The Company's significant accounting policies are summarized in Note 3 to
the consolidated financial statements included in its September 30, 2003 Annual
Report on Form 10-K. An accounting policy considered particularly critical to
the Company's financial results is the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance for loan losses
and non-performing loans is considered a critical accounting policy by
management due to the high degree of judgment involved, the subjectivity of the
assumptions utilized, and the potential for changes in the economic environment
that could result in changes in the necessary allowance.
As discussed in Note 3 to the consolidated financial statements included
in Item 1 of this quarterly report, the Company completed its acquisition of NBF
in April 2002. The acquisition was accounted for as a purchase and, accordingly,
amounts attributable to NBF have been included in the Company's consolidated
financial statements from the date of acquisition.
In April 2002, the Company announced the formation of PMB, a commercial
bank subsidiary of the Bank, to serve the banking needs of municipalities
throughout our service area, and primarily Rockland and Orange Counties. The
Bank is a federally chartered savings association and municipalities in New York
State may only deposit funds with commercial banks. The formation of PMB
provides a vehicle for the deposit of funds that may not be deposited with the
Bank.
19
As of January 14, 2004, the Company completed its stock offering and
acquisition of ENB in connection with Provident Bancorp, MHC's mutual-to-stock
conversion. The acquisition was accounted for as a purchase and, accordingly,
amounts attributable to ENB have been included in the Company's consolidated
financial statements from the date of acquisition. See Note 2 to the
accompanying consolidated financial statements included in Item 1 of this
quarterly report.
Comparison of Financial Condition at June 30, 2004 and September 30, 2003
Total assets as of June 30, 2004 were $1.8 billion, an increase of $608.4
million, or 51.8%, over assets of $1.2 billion at September 30, 2003, and an
increase of $668.0 million, or 59.9%, over assets of $1.1 billion at June 30,
2003. The increase over both periods is due primarily to (i) the January 2004
acquisition of ENB, whose assets totaled $349.7 million on the merger date (ii)
proceeds from the offering in the second-step conversion of $192.2 million, net
of related costs and (iii) internal growth of the company.
Net loans (excluding loans held for sale) as of June 30, 2004 were $970.6
million, an increase of $267.4 million, or 38.0%, over net loan balances of
$703.2 million at September 30, 2003, and an increase of $288.0 million, or
42.2%, over balances at June 30, 2003. Loans acquired from ENB totaled $219.2
million, while allowances for loan losses transferred in connection with ENB
were $5.7 million, or 2.6% of ENB's outstanding loan balances. Inclusive of ENB
loans acquired, commercial loans increased by $226.8 million, or 89.7%, over
balances at September 30, 2003. Consumer loans increased by $44.6 million, or
55.3%, during the nine-month period, while residential loans increased by $2.2
million, or 0.6%. Asset quality continues to be strong. At $5.5 million, or
0.31% of total assets, non-performing assets are up slightly from $4.7 million
at September 30, 2003 and $5.4 million at June 30, 2003.
Total securities increased by $267.7 million, or 71.5%, to $642.0 million
at June 30, 2004 from $374.3 million at September 30, 2003 as the Company
invested the majority of the stock subscription funds received ($192.4 million)
in securities. Investments were made primarily in mortgage-backed securities,
which increased by $179.1 million, or 84.5%, and in U.S. Government and Federal
Agency Securities, which increased by $67.5 million, or 50.6%.
Total deposits as of June 30, 2004 were $1.2 billion, up $371.3 million,
or 42.7%, from September 30, 2003, and $383.3 million, or 44.7%, from June 30,
2003. Deposits acquired from ENB totaled $326.8 million. As of June 30, 2004
retail and commercial transaction accounts were 29.4% of deposits compared to
25.9% at September 30, 2003 and 25.5% at June 30, 2003.
Borrowings from the Federal Home Loan Bank of New York (the "FHLB")
increased by $4.8 million during the nine-month period to $169.6 million at June
30, 2004 from $164.8 million at September 30, 2003.
20
Stockholders' equity increased by $224.7 million to $342.6 million at June
30, 2004 compared to $117.9 million at September 30, 2003. The Company completed
its second-step stock conversion in January 2004, raising $192.2 million in new
capital, net of related costs. In addition, $39.7 million and $4.0 million,
respectively, in new capital was issued for the purchase of ENB and for the
funding of the charitable foundation. Net income of $6.8 million for the
nine-month period also increased capital. Partially offsetting the increases
were the payments of cash dividends totaling $3.4 million, the purchase of
additional ESOP shares totaling $10.0 million and net declines in accumulated
comprehensive income of $7.2 million.
During the first nine months of fiscal 2004, the Company did not
repurchase shares of its common stock. The total shares repurchased under its
previously announced repurchase programs, which authorized the repurchase of up
to 553,990 shares, including the March 2003 authorization of 177,250 shares, was
399,555 shares through June 30, 2004. At June 30, 2004, there were no shares of
common stock held by the Company in treasury as the treasury shares were
cancelled in connection with the second step stock conversion. Pursuant to
applicable Office of Thrift Supervision regulations that restrict stock
repurchases for one year following the completion of a mutual stock conversion,
the authorization to repurchase shares of the Company's common stock expired in
connection with its second-step conversion on January 14, 2004.
Supplemental Reporting of Non-GAAP Results of Operations. The Company is
providing supplemental reporting of its results on a "net operating cash" or
"tangible" basis, from which the Company excludes the after- tax charge for
establishing the charitable foundation, the after-tax effect of amortization of
core deposit intangible assets and expenses associated with merging acquired
operations into the Company. Although "net operating cash income" as defined by
the Company is not a GAAP measure, management believes that this information
helps investors understand the effect of acquisition activity and the
establishment of the charitable foundation in reported results. The after-tax
effect of the establishment of the charitable foundation was $3.0 million ($0.08
per share). Merger integration expenses were $34,000 after tax for the three
months ended June 30, 2004, and $464,000 after tax for the nine months ended
June 30, 2004. The after-tax effect of the amortization of core deposit
intangible assets was $409,000 ($0.01 per diluted share) in the recent quarter,
compared with $62,000 (less than $0.01 per diluted share) in the year-earlier
quarter. Similar amortization charges for the nine months ended June 30, 2004
and 2003 were $881,000, after tax ($0.02 per diluted share) and $207,000 after
tax ($0.01 per diluted share), respectively.
Diluted net operating cash earnings per share, which excludes amortization
of core deposit intangible assets and merger-related expenses, were $0.11 for
the quarter ended June 30, 2004, compared with $0.09 in the second quarter of
2003. Net operating cash income for the recent quarter was $4.1 million, an
increase of 28.1% from $3.2 million in the year-earlier quarter. Expressed as an
annualized rate of return on average assets and average stockholders' equity,
net operating income was 0.92% and 4.75% respectively, in the quarter ended June
30, 2004, compared with 1.15% and 11.10% in the quarter ended June 30, 2003.
21
Reconciliation of GAAP and Non-GAAP results of operations: A
reconciliation of diluted earnings per share and net income with diluted net
operating cash earnings per share and net operating income follows (in
thousands, except per share amounts):
Three months ended June 30, Nine months ended June 30,
--------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Diluted cash earnings per share $ 0.10 $ 0.09 $ 0.18 $ 0.25
Charge for establishment of
charitable foundation(1) -- -- 0.08 --
Merger integration expenses(1) -- -- 0.01 --
Amortization of core deposit
intangibles(1) 0.01 0.00 0.02 0.01
---------- ---------- ---------- ----------
Diluted net cash operating earnings $ 0.11 $ 0.09 $ 0.29 $ 0.26
========== ========== ========== ==========
Net Income $ 3,654 $ 3,106 $ 6,771 $ 8,667
Charge for establishment of
charitable foundation(1) 3,000
Merger integration expenses(1) 34 -- 464 --
Amortization of core deposit
intangibles(1) 409 62 881 207
---------- ---------- ---------- ----------
Net operating cash income $ 4,097 $ 3,168 $ 11,116 $ 8,874
========== ========== ========== ==========
- ----------
(1) After related tax effect at 40% marginal rate
Comparison of Operating Results for the Three Months Ended
June 30, 2004 and June 30, 2003
Net Income. For the three months ended June 30, 2004 net income was $3.7
million, an increase of $548,000, or 17.6%, compared to $3.1 million for the
same period in fiscal 2003. Net interest income after provision for loan losses
for the three months ended June 30, 2004 increased by $5.2 million, or 46.8%,
compared to the same period in the prior year. Non-interest income remained the
same at $2.9 million for the three months ended June 30, 2004 and June 30, 2003.
Non-interest expenses increased $4.3 million, or 46.7%, to $13.5 million for the
three months ended June 30, 2004 compared to $9.2 million for the same
prior-year period.
The relevant performance measures follow:
Three Months Ended
June 30,
2004 2003
---- ----
Per common share:
Basic earnings $ 0.10 $ 0.09
Diluted earnings 0.10 0.09
Dividends declared 0.04 0.04
Return on average (annualized):
Assets 0.82% 1.13%
Equity 4.24% 10.89%
22
The following table sets forth the consolidated average balance sheets for
the Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
Three Months Ended June 30,
---------------------------
2004 2003
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial and commercial mortgage
loans(1) $ 447,784 $ 7,324 6.58% $ 222,737 $ 3,660 6.59%
Consumer loans(1) 119,603 1,386 4.66 79,797 967 4.86
Residential mortgage loans(1) 378,454 5,590 5.94 379,847 6,085 6.43
---------- ---------- ---------- ----------
Total loans 945,841 14,300 6.08 682,381 10,712 6.30
---------- ---------- ---------- ----------
Securities-taxable 557,661 5,233 3.77 301,512 3,261 4.34
Securities-tax exempt(2) 44,562 636 5.74 17,025 252 5.94
Other earning assets 10,473 38 1.46 17,075 115 2.70
---------- ---------- ---------- ----------
Total securities and other earning assets 612,696 5,907 3.88 335,612 3,628 4.34
---------- ---------- ---------- ----------
Total interest-earning assets 1,558,537 20,207 5.21 1,017,993 14,340 5.65
Non-interest-earning assets: 236,410 82,858
---------- ----------
Total assets $1,794,947 $1,100,851
========== ==========
Interest bearing liabilities:
Savings, clubs and escrow $ 377,845 $ 409 0.44% $ 283,360 $ 322 0.46%
Money market accounts 176,544 225 0.51 124,046 245 0.79
NOW checking 98,611 53 0.22 84,095 52 0.25
Certificate accounts 349,126 1,450 1.67 236,363 1,212 2.06
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,002,126 2,137 0.86 727,864 1,831 1.01
Borrowings 180,154 1,350 3.01 117,954 1,144 3.89
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,182,280 3,487 1.19 845,818 2,975 1.41
---------- ----------
Non-interest-bearing liabilities: 265,904 140,608
---------- ----------
Total liabilities 1,448,184 986,426
Stockholders' Equity 346,763 114,425
---------- ----------
Total liabilities and equity 1,794,947 1,100,851
========== ==========
Net interest margin $ 16,720 4.31% $ 11,365 4.48%
========== ==== ========== ====
Net interest rate spread 4.02% 4.24%
==== ====
Net earning assets $ 376,257 $ 172,175
========== ==========
Tax equivalent adjustment(2) (223) (88)
Net interest income $ 16,497 $ 11,277
========== ==========
Ratio of average interest-earning assets
to average interest-bearing liabilities 131.82% 120.36%
========== ==========
- ----------
(1) Includes non-accrual loans.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
23
The table below details the changes in interest income and interest
expense for the periods indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Three Months Ended June 30,
2004 vs. 2003
Increase/(Decrease) Due to
--------------------------
Volume(1) Rate(1) Total
--------- ------- -----
Interest-earning assets
Commercial and commercial
mortgage loans $ 3,670 $ (6) $ 3,664
Consumer loans 461 (42) 419
Residential mortgage loans (22) (473) (495)
Securities-taxable 2,453 (481) 1,972
Securities-tax exempt(2) 393 (9) 384
Other earning assets (35) (42) (77)
------- ------- -------
Total interest income 6,920 (1,053) 5,867
------- ------- -------
Interest-bearing liabilities
Savings 102 (15) 87
Money market 84 (104) (20)
NOW checking 8 (7) 1
Certificates of deposit 500 (261) 239
Borrowings 506 (301) 205
------- ------- -------
Total interest expense 1,200 (688) 512
------- ------- -------
Net interest margin $ 5,720 $ (365) $ 5,355
======= ======= =======
Less tax equivalent adjustment(2) (226) 91 (135)
------- ------- -------
Net interest income $ 5,494 $ (274) $ 5,220
======= ======= =======
- ----------
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
24
Net Interest Income. Net interest income after provision for loan losses
for the three months ended June 30, 2004 was $16.3 million, compared to $11.1
million for the three months ended June 30, 2003, an increase of $5.2 million or
46.9%. The increase in net interest income was largely due to a $540.5 million
increase in average interest earning assets to $1.6 billion during the quarter
ended June 30, 2004, as compared to $1.0 billion for the same quarter in the
prior year, due primarily to the Ellenville National Bank acquisition, net
proceeds from the second-step offering and continued internal growth. The
increase in average interest earning assets was partially offset by a decline in
average yield of 44 basis points from 5.65% to 5.21%. Despite a decrease in the
average cost of interest-bearing liabilities of 22 basis points interest expense
increased $512,000 for the quarter compared to the same quarter in 2003, as
average interest-bearing liabilities increased by $336.5 million. On a fully
taxable equivalent basis, net interest margin declined by 17 basis points to
4.31%, while net interest spread declined by 22 basis points to 4.02%.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged to earnings, in order to maintain the allowance for loan
losses at a level to absorb probable loan losses inherent in the existing
portfolio. The Company recorded $225,000 and $200,000 in loan loss provisions
during the three months ended June 30, 2004 and 2003, respectively. The increase
in the provision reflects the overall growth in the commercial lending portfolio
for the quarter.
Non-Interest Income was $2.9 million for both the three months ended June
30, 2004 and June 30, 2003. Gains on the sale of securities were $446,000 for
the current three-month period, compared to $811,000 for the same period last
year. During the three-month period ended June 30, 2004, the Company recorded
gains on sales of loans totaling $61,000, compared to $394,000 for the same
period last year. Excluding the effects of gains on sales of securities and
loans, the increase in non-interest income was $685,000, or 40.7%. Banking fees
and service charges increased by $714,000, or 59.7%, of which $449,000 was
generated from the acquired Ellenville National Bank ("Ellenville")branches and
$265,000 was due primarily to volume-driven increases in overdraft,
non-sufficient funds, and ATM and debit card fees. Other non-interest income
decreased by $29,000, or 6.0%, due primarily to lower earnings on the Company's
bank owned life insurance ("BOLI") investments.
Non-Interest Expense for the three months ended June 30, 2004 increased by
$4.3 million, or 46.7%, to $13.5 million, compared to $9.2 million for the three
months ended June 30,2003. The acquisition of ENB in January 2004 played a major
role in the increases in most categories. Compensation and employee benefits
increased by $1.6 million, or 36.4%, to $6.1 million for the period ended June
30, 2004. Of that amount, $700,000 was attributable to the ENB acquisition and
the remainder was due to staff additions for future growth and expansion, as
well as normal merit increases. An increase in stock-based compensation plans of
$147,000, or 35.8%, occurred during the current three-month period primarily due
to vesting and allocations of benefit plans at an average price per share of
common stock of $10.91 per share for the three months ended June 30, 2004
compared to $7.30 per share for the three months ended June 30, 2003. Occupancy
and office operations increased by $523,000, or 39.6%, for the three months
ended June 30, 2004, almost all of which was attributable to the acquired
Ellenville properties. Professional fees increased by $230,000, or 54.0%, due
primarily to fees associated with the Company's compliance with the provisions
of Section 404 of the Sarbanes-Oxley Act of 2002, related to internal controls,
and fees paid to consultants engaged to run day-to-day operations, as the
Company's permanent employees focused on the integration of Ellenville National
Bank and the pending acquisition of Warwick Community Bancorp. Amortization of
core deposit intangible increased by $578,000 as a result of the Ellenville
deposits acquired. Stationery and office supplies increased by $197,000, or
132.2%, as the new Ellenville branches were stocked. Other expenses increased by
25
$528,000, or 44.7%, due primarily to increases of $136,000, $56,000, $42,000 and
$68,000 in SEC and shareholder-related expenses, courier expenses, correspondent
bank expense and postage, respectively. Further, merger integration expenses
related to the acquisition of ENB were $56,000.
Income Taxes. Income tax expense was $2.0 million for the three months
ended June 30, 2004, compared to $1.7 million expense for the same period in
2003. The effective tax rates were 35.2% and 35.1%, respectively.
Comparison of Operating Results for the Nine Months Ended
June 30, 2004 and June 30, 2003
Net Income. For the nine months ended June 30, 2004 net income was $6.8
million, down $1.9 million, or 28%, compared to $8.7 million for the same period
of 2003. Net interest income after provision for loan losses increased to $43.4
million for the nine months ended June 30, 2004, an increase of $9.8 million, or
29.2%, compared to $33.6 million for the nine months ended June 30, 2003.
Non-interest income was $8.5 million for the nine months ended June 30, 2004
compared to $7.3 million for the same period last year, an increase of $1.2
million, or 16.4%. Non-interest expenses increased $14.5 million, or 53.4%
(including the $5.0 million contribution to the charitable foundation), to $41.7
million for the nine months ended June 30, 2004 compared to $27.2 million for
the same prior-year period.
The relevant performance measures follow:
Nine Months Ended
June 30,
2004 2003
---- ----
Per common share:
Basic earnings $0.19 $ 0.25
Diluted earnings 0.18 0.25
Dividends declared 0.11 0.09
Return on average (annualized):
Assets 0.59% 1.09%
Equity 3.51% 10.27%
26
The following table sets forth the consolidated average balance sheets for
the Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities (dollars in thousands).
Nine Months Ended June 30,
--------------------------
2004 2003
---- ----
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Interest earning assets:
Commercial and commercial mortgage
loans(1) $ 358,255 $ 17,427 6.50% $ 213,152 $ 11,306 7.09%
Consumer loans(1) 101,027 3,720 4.92 81,550 3,136 5.14
Residential mortgage loans(1) 393,407 17,504 5.94 384,510 18,745 6.52
---------- ---------- ---------- ----------
Total loans 852,689 38,651 6.05 679,212 33,187 6.53
---------- ---------- ---------- ----------
Securities-taxable 494,032 13,693 3.70 282,002 9,719 4.61
Securities-tax exempt(2) 35,143 1,447 5.50 18,388 796 5.79
Other earning assets 11,192 103 1.23 11,173 292 3.49
---------- ---------- ---------- ----------
Total securities and other earning assets 540,367 15,243 3.77 311,563 10,807 4.64
---------- ---------- ---------- ----------
Total interest-earning assets 1,393,056 53,894 5.17 990,775 43,994 5.94
Non-interest-earning assets: 147,247 74,639
---------- ----------
Total assets $1,540,303 $1,065,414
========== ==========
Interest bearing liabilities:
Savings, clubs and escrow $ 346,499 1,141 0.44% $ 269,528 1,187 0.59%
Money market accounts 144,264 601 0.56 119,100 786 0.88
NOW checking 82,548 134 0.22 82,189 169 0.27
Certificate accounts 302,918 3,805 1.68 241,683 3,985 2.20
---------- ---------- ---------- ----------
Total interest-bearing deposits 876,229 5,681 0.87 712,500 6,127 1.15
Borrowings 157,207 3,719 3.16 108,688 3,184 3.92
---------- ---------- ---------- ----------
Total interest-bearing liabilities 1,033,436 9,401 1.22 821,188 9,311 1.52
Non-interest-bearing liabilities: 248,963 131,425
---------- ----------
Total liabilities 1,282,399 952,613
Stockholders' Equity 257,904 112,801
---------- ----------
Total liabilities and equity $1,540,303 $1,065,414
========== ==========
Net interest margin $ 44,493 4.27% $ 34.683 4.68%
========== ==== ========== ====
Net interest rate spread 3.95% 4.42%
==== ====
Net earning assets $ 359,620 $ 169,587
========== ==========
Tax equivalent adjustment(2) (507) (279)
========== ==========
Net interest income $ 43,986 $ 34,404
========== ==========
Ratio of average interest-earning assets
to average interest-bearing liabilities 134.81% 120.65%
========== ==========
- ----------
(1) Includes non-accrual loans.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
27
The table below details the changes in interest income and interest
expense for the periods indicated due to both changes in average outstanding
balances and changes in average interest rates (in thousands):
Nine Months Ended June 30,
2004 vs. 2003
Increase/(Decrease) Due to
--------------------------
Volume(1) Rate(1) Total
--------- ------- -----
Interest-earning assets
Commercial and commercial
mortgage loans $ 7,135 $ (1,014) $ 6,121
Consumer loans 724 (140) 584
Residential mortgage loans 434 (1,675) (1,241)
Securities-taxable 6,197 (2,223) 3,974
Securities-tax exempt(2) 693 (42) 651
Other earning assets 0 (189) (189)
-------- -------- --------
Total interest income 15,183 (5,283) 9,900
-------- -------- --------
Interest-bearing liabilities
Savings 298 (343) (45)
Money market 142 (327) (185)
NOW checking 1 (36) (35)
Certificates of deposit 882 (1,062) (180)
Borrowings 1,237 (702) 535
-------- -------- --------
Total interest expense 2,560 (2,470) 90
-------- -------- --------
Net interest margin $ 12,623 $ (2,813) $ 9,810
======== ======== ========
Less tax equivalent adjustment(2) (244) 16 (228)
-------- -------- --------
Net interest income $ 12,379 $ (2,797) $ 9,582
======== ======== ========
(1) Changes due to increases in both rate and volume have been allocated
proportionately to rate and volume.
(2) Tax equivalent adjustment for tax exempt income is based on a 35% federal
rate.
28
Net Interest Income after provision for loan losses increased by $9.8
million, or 29.2%, to $43.4 million for the nine-months ended June 30, 2004 from
$33.6 million for the same period in 2003. The increase in interest income
reflects an increase in average earning assets of $402.3 million to $1.4
billion, offset by a decline in yield of 78 basis points to 5.12%. The cost of
interest bearing liabilities increased by $90,000 as the average balances
increased by $212.2 million to $1.0 billion, even though the average rate paid
on average interest bearing funds decreased 30 basis points to 1.22%. On a fully
taxable equivalent basis, net interest margin decreased from 4.68% to 4.27% and
net interest spread declined from 4.42% to 3.95%.
Provision for Loan Losses. The Company records provisions for loan losses,
which are charged in earnings, in order to maintain the allowance for loan
losses at a level to absorb probable loan losses inherent in the existing
portfolio. The Company recorded $575,000 and $800,000 in loan loss provisions
during the nine months ended June 30, 2004 and 2003, respectively. The decrease
in the provision reflects the strong coverage ratios provided by the allowance,
as well as the Company's historical charge-off ratios.
Non-Interest Income for the nine-month period ended June 30, 2004
increased to $8.5 million, an increase of $1.2 million, or 16.4%, compared to
$7.3 million for the same nine-month period last year. Gains on sales of
securities and loans were $1.9 million and $231,000, respectively, for the
current period, generating a combined decrease of $606,000 from the securities
and loan sales gains of $1.9 million and $836,000, respectively, for the same
period last year. Banking fees and service charges increased to $5.1 million for
the current nine-month period, an increase of $1.7 million, or 49.5%, over the
same period last year. The increase is primarily attributable to increases in
service fees of $867,000 resulting from the acquired branches, coupled with
volume-related increases in service fees on new and existing accounts at the
original Provident branches. Other income increased by $127,000, or 11.3%, to
$1.3 million for the nine-month period ended June 30, 2004, from $1.1 million
for the same period last year. The increase is primarily due to $422,000 in
income from the BOLI for the current nine-month period compared to $324,000 for
the same period last year, as the BOLI program was only established for six
months of fiscal 2003.
Non-Interest Expense excluding the Charitable Foundation contribution of
$5.0 million, was $36.7 million for the nine-month period ended June 30, 2004,
an increase of $9.5 million, or 35.1%, compared to $27.1 million for the same
nine-month period last year. Increases in compensation and benefits directly
attributable to the acquisition of ENB were $1.2 million and in occupancy and
office operations were $564,000. Compensation and benefits increased by an
additional $2.3 million, due to annual salary increases and staff additions.
Stock-based compensation expense increased by $664,000, or 46.8%, as the
company's per share value increased from an average of $7.01 per share for the
nine months ended June 30, 2003 to an average of $10.87 per share for the nine
months ended June 30, 2004. Also, the Company allocated additional shares
related to the $10.0 million ESOP purchase. Professional fees were $1.7 million
for the nine-month period ended June 30, 2004, an increase of $446,000, or
36.7%, over the comparable period in the prior year. The increase is primarily
due to the additional fees associated with Section 404 of the Sarbanes-Oxley Act
of 2002, related to internal controls compliance, and the fees for contracted
consultants engaged during the integration period of Ellenville National Bank
and the planning period for the integration of Warwick. Additional increases in
non-interest expense categories for the current year-to-date period are
advertising costs of $255,000, or 19.8%, and a volume-related increase of
$424,000, or 19.6%, in data and check processing costs. Amortization of
intangible assets increased by $1.1 million due to the addition of the ENB core
deposit intangible. Other non-interest expense increased by $871,000, or 24.2%,
primarily due to increases in Securities and Exchange
29
Commission and shareholder relations expenses ($160,000), regulatory assessments
($84,000), postage ($150,000) and correspondent bank expense ($123,000).
Income Taxes. Income tax expense was $3.4million for the nine months ended
June 30, 2004 compared to $5.0 million for the same period in 2003. Excluding
the impact of the charitable foundation contribution, the effective tax rates
were 35.5% and 36.5%, respectively. Including the impact of the charitable
foundation, the effective tax rate for the nine months ended June 30, 2004 was
33.3%.
30
Liquidity and Capital Resources
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and securities, and, to a lesser
extent, wholesale borrowings, the proceeds from maturities of securities and
short-term investments, and proceeds from sales of loans originated for sale and
securities available for sale. Maturities and scheduled amortization of loans
and securities, as well as proceeds from borrowings, are predictable sources of
funds. Other funding sources, however, such as deposit inflows and mortgage
prepayments are greatly influenced by market interest rates, economic conditions
and competition.
The Company's primary investing activities are the origination of both
residential one- to four-family and commercial mortgage loans, and the purchase
of investment securities and mortgage-backed securities. During the nine-months
ended June 30, 2004 and June 30, 2003, loan originations, excluding loans
originated for sale, totaled $251.3 million and $278.9 million, respectively,
and purchases of securities totaled $452.6 million and $155.6 million,
respectively. For the nine-month periods ended June 30, 2004 and 2003, these
investing activities were funded primarily by principal repayments on loans, by
proceeds from sales and maturities of securities, by deposit growth and stock
subscriptions received in the Company's stock offering completed in January
2004. Loan origination commitments totaled $63.6 million at June 30, 2004. The
Company anticipates that it will have sufficient funds available to meet current
loan commitments. In December 2002 the Company invested $12 million in BOLI
contracts. Such investments are illiquid and are therefore classified as other
assets. As the Company's quarterly earnings exceeded $3.6 million, it is
expected that the funds will be replaced by retained earnings in approximately
1.5 years, thereby not having a significant impact on capital and liquidity.
Earnings from BOLI are derived from the net increase in cash surrender value.
Deposit flows are generally affected by the level of interest rates, the
interest rates and products offered by local competitors, the appeal of
non-deposit investments, and other factors. Excluding the acquisition of ENB,
the net increase in total deposits for the nine months ended June 30, 2004 was
$44.3 million, compared to $57.9 million for the nine months ended June 30,
2003.
On January 14, 2004 the Company completed its stock offering in connection
with the second-step conversion of Provident Bancorp, MHC. As a result of the
conversion, the Company became the stock holding company of the Bank. In the
stock offering, shares representing Provident Bancorp, MHC's ownership interest
in Provident Federal were sold to investors. In addition, the Company
simultaneously completed its acquisition of E.N.B. Holding Company, Inc.,
located in Ellenville, New York.
The Company sold 19,573,000 shares of common stock at $10.00 per share to
depositors of the Bank as of June 30, 2002 and September 30, 2003. The Company
also issued 400,000 shares of common stock and contributed $1.0 million in cash
to the Provident Bank Charitable Foundation. In addition, each outstanding share
of common stock of the Company as of January 14, 2004 has been converted into
4.4323 new shares of the Company's common stock.
31
Shareholders of ENB as of the close of business on January 14, 2004
received total merger consideration of approximately $76.47 million, consisting
of 3,969,676 shares of common stock of the Company and approximately $36.77
million in cash.
The Company monitors its liquidity position on a daily basis. We generally
remain fully invested and utilize additional sources of funds through Federal
Home Loan Bank of New York overnight and term advances, of which $169.3 were
outstanding at June 30, 2004. The Company has the ability to borrow an
additional $300.6 million under its credit facilities with the Federal Home Loan
Bank of New York.
At June 30, 2004, the Bank exceeded all of its regulatory capital
requirements with a Tier 1 capital (leverage) level of $199.0 million, or 11.9%
of adjusted assets (which is above the required level of $67.1 million, or 4.0%)
and a total risk-based capital level of $213.1 million, or 17.7% of
risk-weighted assets (which is above the required level of $90.0 million, or
8.0. Regulations require leverage and total risk-based capital ratios of 5.0%
and 10.0%, respectively, in order to be classified as well-capitalized. In
performing this calculation, the intangible assets recorded in the April 2002
NBF acquisition and the January 2004 ENB acquisition are deducted from capital
and from total adjusted assets for purposes of regulatory capital measures. At
June 30, 2004, the Bank exceeded all capital requirements for well-capitalized
classification. These capital requirements, which are applicable to the Bank
only, do not consider additional capital retained at the holding company level.
The following table sets forth the Bank's regulatory capital position at
June 30, 2004 and September 30, 2003, compared to OTS requirements.
OTS Requirements
------------------------------------------
Minimum Capital For Classification
Bank Actual Adequacy as Well Capitalized
----------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
June 30, 2004
Tangible capital $199,022 11.9% $ 25,166 1.5% $ -- --
Tier 1 (core) capital 199,022 11.9 67,107 4.0 83,884 5.0
Risk-based capital:
Tier 1 199,022 17.7 67,552 6.0
Total 213,136 18.9 90,070 8.0 112,587 10.0
September 30, 2003
Tangible capital $ 93,497 8.1% $ 17,231 1.5% $ -- --%
Tier 1 (core) capital 93,497 8.1 45,950 4.0 57,437 5.0
Risk-based capital:
Tier 1 93,497 13.7 -- -- 40,835 6.0
Total 102,041 15.0 54,447 8.0 68,058 10.0
32
Asset/Liability Management
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities and capital resources. The Company's
Asset and Liability Committee ("ALCO") of the Board monitors, and the Bank,
through its Management ALCO, controls the rate sensitivity of the balance sheet
while seeking to maintain an appropriate level of net interest income
contribution to the operations of the Company.
The Company's net interest income is affected by fluctuations in market
interest rates as a result of timing differences in the repricing of its assets
and liabilities. These repricing differences are quantified in specific time
intervals and are referred to as interest rate sensitivity gaps. The Company
manages the interest rate risk of current and future earnings to a level that it
considers consistent with its mix of business and seeks to limit such risk
exposure to appropriate percentages of both earnings and the imputed value of
stockholders' equity. The objective in managing interest rate risk is to support
the achievement of business strategies, while controlling earnings variability
and seeking to provide appropriate liquidity. Further, the historical level of
transaction accounts (greater than 15% of total assets) serves to mitigate the
effects of increases in interest rates and reduce the average cost of total
liabilities.
The following chart (dollars in thousands) provides a quantification of
the Company's interest rate sensitivity gap as of June 30, 2004, based upon the
known repricing dates of certain assets, at amortized cost, and liabilities and
the assumed repricing dates of others. As shown in the following chart, at June
30, 2004, assuming no management action, the Company's principal interest rate
risk is to a falling rate environment, and particularly within a one-year time
frame. That is, net interest revenue would be expected to be adversely affected
by a decrease in interest rates below the rates embedded in the current yield
curve, principally due to the higher level of assets ($666 million) that would
reprice relative to similarly categorized liabilities ($652 million) in that
time frame.
33
Three Four
months months to Total within One to Over Five
Maturity Repricing Date(1) or less One Year One Year Five Years Years TOTAL
- -------------------------- ------- -------- -------- ---------- ----- -----
Securities $ 45 $ 59 $ 104 $ 452 $ 86 $ 642
Fixed Rate Loans(3) 117 175 292 226 94 612
Variable Rate Loans (2,3) 225 45 270 87 5 362
------ ------ ------ ------ ------ ------
Total Interest Earnings Assets(1) $ 387 $ 279 $ 666 $ 765 $ 185 $1,616
====== ====== ====== ====== ====== ======
Total Deposits(4,5) $ 212 $ 380 $ 592 $ 387 $ 263 $1,242
Borrowing(6) 43 5 48 118 4 170
Other 12 -- 12 -- -- 12
------ ------ ------ ------ ------ ------
Total Repricable Liabilities $ 267 $ 385 $ 652 $ 505 $ 267 $1,424
====== ====== ====== ====== ====== ======
Period Gap 120 (106) 14 260 (82) 192
Percent of Total Assets 6.73% (5.97%) 0.74% 14.58% (4.60)%
Cumulative Gap 120 14 14 274 192
Percent of Total Assets (cumulative) 6.73% 0.79% .79% 15.37% 10.77%
- ----------
(1) Interest rate sensitivity gaps are defined as the fixed rate positions
(assets less liabilities) for a given time period. The gaps measure the
time weighted dollar equivalent volume of positions fixed for a particular
period. The gap positions reflect a repricing date at which date funds are
assumed to "mature" and reprice to a current market rate for the asset or
liability. The table does not include loans on nonaccrual status as of
June 30, 2004.
(2) Prime-priced loans are considered as zero - three month assets.
(3) Variable rate balances are reported on their repricing formulas. Fixed
rate balances are reported based on their scheduled contractual maturity
dates, except for certain investment securities and loans secured by 1-4
family residential properties that are based on anticipated cash flow.
(4) Noninterest bearing deposit liabilities were approximately $277 million at
June 30, 2004.
(5) Time deposits totaling $346 million are classified by contractual maturity
or repricing frequency as of June 30, 2004.
(6) Borrowings of $170 million as of June 30, 2004 are classified by
contractual maturity or repricing frequency.
34
Recent Accounting Standards
In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 (revised), Consolidation of Variable Interest
Entities ("FIN 46R"), which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means other
than voting rights and, accordingly, should consolidate the variable interest
entity ("VIE"). FIN 46R replaces FASB Interpretation No. 46, which was issued in
January 2003. As a public company that is not a small business issuer (as
defined in applicable SEC regulations), the Company is required to apply FIN 46R
to variable interests generally as of March 31, 2004 and to special-purpose
entities as of December 31, 2003. For any VIE's that must be consolidated under
FIN 46R that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts and any difference between the net amount added to the balance
sheet and any previously recognized interest would be recorded as the cumulative
effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure
the assets, liabilities and noncontrolling interest of the VIE. The adoption of
FIN 46R did not and is not expected to have a significant effect on the
Company's consolidated financial statements.
In December 2003, the FASB also issued Statement of Financial Accounting
Standards No. 132 (revised), Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS No. 132R"). This standard prescribes employers'
disclosures about pension plans and other postretirement benefit plans, but does
not change the measurement or recognition of those plans. SFAS No. 132R retains
and revises the disclosure requirements contained in the original standard. It
also requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. As a public company, the Company will be required
to provide substantially all of the revised disclosures beginning with its
September 30, 2004 consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
requires that an issuer classify financial instruments that are considered a
liability (or an asset in some circumstances) when that financial instrument
embodies an obligation of the issuer.
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 had no impact
on the Company's consolidated statement of financial condition or results of
operations upon implementation during the third quarter of 2003. In November
2003, the FASB also issued a staff position that indefinitely deferred the
effective date of SFAS No. 150 for certain mandatorily redeemable
non-controlling interests. The Company currently believes that the deferral of
the effective date of SFAS No. 150 for certain mandatorily redeemable
non-controlling interests will not have any impact on its consolidated statement
of financial condition or results of operations when implemented.
The issuance of SFAS No. 150 and FIN 46 has also resulted in the Federal
Reserve Board announcing potential future reconsideration of trust preferred
securities as elements of regulatory capital. The Company currently has no
issuances of trust preferred securities.
In March 2004, the FASB published an Exposure Draft, "Share-Based Payment,
an Amendment of FASB Statements No. 123 and 95." The Exposure Draft proposes
changes in accounting that would
35
replace existing requirements under SFAS 123 and APB Opinion NO 25, "Accounting
for Stock Issued to Employees." Under the proposal, all forms of share-based
payments to employees, including employee stock options, would be treated the
same as other forms of compensation by recognizing the related cost in the
income statement. The expense of the award would generally be measured at fair
value at the grant date. Current accounting guidance requires that the expense
relating to so-called fixed plan employee stock options only be disclosed in the
footnotes to the financial statements.
In March 2004, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 105 (SAB 105), "Application of Accounting Principles to
Loan Commitments." This staff bulletin is effective for interest rate locks
entered into or substantially modified on or after April 1, 2004. This bulletin
and subsequent interpretations did not have a material impact on the Company's
results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The company's most significant form of market risk is interest rate risk,
as the majority of its assets and liabilities are sensitive to changes in
interest rates. The Bank's interest rate profile has changed since September 30,
2003 as a result of the $192.4 million in new capital and the acquisition of
ENB. As a result of these events, the Bank has become more asset sensitive,
which indicates that more of the Bank's assets will now reprice quicker than its
liabilities and that net interest income should increase if rates increase
gradually. However, if rates increase rapidly as a result of an improving
economy, the Bank may have to increase the rates paid on deposits and borrowed
funds quicker than loans and investments reprice, resulting in a negative impact
on interest spreads and net interest income. In addition, the impact of rising
rates could be compounded if deposit customers move funds from savings accounts
back to higher-rate certificate of deposit accounts. Conversely, should market
interest rates continue to fall below today's level the Company's net interest
margin could also be negatively affected, as competitive pressures could keep
the Bank from lowering rates on its deposits, and prepayments and curtailments
on assets may continue. Such movements may cause a decrease in the interest rate
spread and net interest margin. Other types of market risk, such as foreign
exchange rate risk and commodity price risk, do not arise in the normal course
of the Company's business activities.
As discussed in Note 2, as of January 14, 2004, the Company completed its
stock offering and acquisition of ENB. The Company received $192.4 million in
new funds for stock subscriptions; pending utilization of funds for its general
business needs, the proceeds were invested in securities (primarily mortgage
backed securities), securities of US government sponsored agencies and US
Treasuries with an average life of approximately three years.
Quantitative and qualitative disclosure about market risk is presented at
September 30, 2003 in Item 7A in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on December 29, 2003. The following
is an update of the discussion provided therein.
General: The Company's largest component of market risk continues to be
interest rate risk. The Company is not subject to foreign currency exchange or
commodity price risk. At June 30, 2004, neither the Company nor the Bank owned
any trading assets, nor did they utilize hedging transactions such as interest
rate swaps and caps.
GAP Analysis: The one-year and five-year cumulative interest sensitivity
gap as a percentage of total assets have changed from (17%) and 10% at September
30, 2003, respectively, to 0.74% and 15.32% at June 30, 2004, respectively.
Investments, loans and fixed rate time deposits utilized contractual
36
repricing dates in this analysis. Non-maturity deposits (demand, money market
and savings) have been decayed utilizing national norms.
Interest Rate Risk Compliance: The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at September 30, 2003. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value change at June 30, 2004 compared to September 30, 2003, and the impact of
possible changes within the Company's models continue to fall within all board
approved limits for potential interest rate volatility.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the
"Exchange Act") as of the end of the period covered by this report. Based upon
that evaluation, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, concluded that, as of the end of the period covered
by this report, the Company's disclosure controls and procedures were effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time frames specified in the SEC's rules and
forms.
There were no significant changes made in the Company's internal controls
over financial reporting or in other factors that could significantly affect the
Company's internal control over financial reporting during the period covered by
this report.
37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which,
in the aggregate, involved amounts which are believed to be immaterial to the
consolidated financial condition and operations of the Company.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(a) - (d) Not applicable
(e)
Issuer Purchases of Equity Securities
Maximum Number (or
Total Number of Shares Approximate Dollar
(or Units) Purchased Value) of Shares (or
Total Number of Average Price as Part of Publicly Units) that may yet be
Shares (or Units) Paid per Share Announced Plans or Purchased Under the
Period Purchased(1) (or Unit) Programs(2) Plans or Programs
April 1 - April 30, 2004 -- -- -- --
May 1 - May 31, 2004 -- -- -- --
June 1 - June 30, 2004 9,417 $10.61 0 0
----- ------ ----- -----
Total 9,417 $10.61 0 0
===== ====== ===== =====
- ----------
(1) The total number of shares purchased during the periods indicated includes
shares purchased as part of publicly announced programs and shares deemed
to have been received from employees who exercised stock options by
attesting to previously acquired common shares in satisfaction of the
exercise price, as is permitted under Provident's stock option plans.
(2) OTS regulations prohibit the repurchase of common shares for a period of
one year following a second step stock conversion.
38
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On April 22, 2004, the Company held its annual meeting of
stockholders for the purpose of the election of four Directors to three year
terms and the ratification of the appointment of KPMG LLP as the Company's
independent auditors for the fiscal year ending September 30, 2004.
The number of votes cast at the meeting as to each matter acted upon was as
follows:
VOTES FOR VOTES WITHHELD
1. Election of Directors:
William Helmer 32,320,906 204,003
Donald T. McNelis 32,321,506 203,403
William R. Sichol, Jr. 32,270,838 254,071
F. Gary Zeh 32,321,335 203,574
-------------------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST VOTES ABSTAINING
-------------------------------------------------------------------------------------------
2. Ratification of the Appointment
of KPMG LLP as the Company's 32,195,272 242,918 86,719
Independent Auditors
-------------------------------------------------------------------------------------------
Item 5. Other Information
None
39
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
-------------- -----------
10.10 Employment agreement of Senior Vice President and Chief
Financial Officer, Paul A. Maisch.
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the three
months ended June 30, 2004:
1) On April 22, 2004, the Company filed a Form 8-K announcing
that it issued a press release regarding its earnings for the
fiscal quarter ended March 31, 2004.
40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Bancorp, Inc.
-----------------------
(Registrant)
By: \s\ George Strayton
-------------------
George Strayton
President and Chief Executive Officer
(Duly Authorized Representative)
Date: August 6, 2004
By: \s\ Paul A. Maisch
------------------
Paul A. Maisch
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Representative)
Date: August 6, 2004
41